RISK UNDERVALUATION IN MINERAL PROJECTS

Reporting to markets should (have to!) be complete, independent and competent.

Risk is a key factor; in most cases, along with commodity price, the most important variable defining a project’s value. The importance of a good estimate of the risk measure (the discount rate in DCF models) cannot be overemphasized.

Yet, something is wrong, very wrong:

In most cases (in a sample of 77 documents reporting pre-feasibility, feasibility studies and valuation exercises of operating assets), the magical discount rates used in DCF are 5% and 8%, accounting for 26% and 27% of the cases (10% accounts for 17%). In 75% of the analised cases, the used discount rate is ≤ 8%. Let’s say you are an investor, would you accept a lower than 8% rate in most mineral projects?

The 5% magical number is pervasive in gold projects. A new rule can almost be written; IF gold THEN 5%.

Reports include countless pages of technical minutia and detail of doubtful utility for the average investor; yet only a handful of them has any discussion or justification of the chosen discount rate.

Country risk is irrelevant; I will grant that the 77 sample is relatively small but the anecdotal evidence shows that the same risk is attributed to projects in the US and Canada or in Burkina Faso and Colombia.

Please bear in mind these are preliminary results; as more data is compiled, new trends may develop. Although I tried to have a random sample, diamond and gold projects may be overrepresented (20 and 21 out of 77, respectively).

I will present these and other results at SME’s Mining Finance Conference in NYC on May 1 and 2, a little more than a week from now. If you are attending, I would like to discuss in person the reasons behind this and how should this (can it?) be remediated – or shouldn’t reporting to markets be complete, independent and competent?

Being a member of SME and of the Society of Economic Geologists – SEG I will try to discuss this issue within these professional organisations. Your comments (in person or through online fora) are always welcome.

The New York Section of the Society for Mining, Metallurgy & Exploration is the host and organizer of the SME’s annual Current Trends in Mining Finance Conference. In the heart of New York (where else?), the CTMF Conference format encourages networking and discussions with colleagues, fellow professionals and key experts – at the Sunday Dinner, breakfasts, breaks, lunches and evening receptions and workshops.

The organisation thanks Shearman & Sterling LLP, the host of the 2017 CTMF Conference again at its conference facilities in Midtown Manhattan. We also thank the Government of Quebec as a returning as Sponsor of the Monday May 1st Lunch – a Senior Official from Quebec will be a Key Note speaker.

Quebec will also host an evening reception on Monday May 1st at their offices in Rockefeller Center to which conference delegates will be invited.
Quebec is also returning with a delegation of mining companies.

At the dinner on Sunday April 30th, 2017 Neal Rigby, PhD, CEng, AIME, MIMMM, Corporate Consultant (Mining) at SRK Consulting will be one of two Guest Speakers. The Sunday dinner – after two pre-conference workshops – is an enjoyable time to meet others, including members of the New York finance, investment and analyst community.

Mining finance is a key issue for junior companies, a species currently with a high mortality. It isn’t a coincidence that “Survival of the fittest” are this study’s opening words.
Compiled by the Mining Journal and published a few weeks ago, “The Global Mining Finance Guide has brought together several of the mining industry’s leading professionals – from some of the most respected companies to service the sector – to share their unique insights and explain the intricacies behind mining finance“. You can download a copy here.
When reviewing a subject, this kind of summary reports is always my favourite starting point. You won’t become an instant expert but you’ll spot main trends are and where do dig for further knowledge and information.